Huge, insurmountable problems for a company can spell disaster. Passable problems and solid fundamentals, on the other hand, can create ripe opportunities for investors. Apple (AAPL +0.17%) and Biogen (BIIB +2.88%) are facing down troubles that could create value if resolved. Is an opportunity present? Let's take a look.
Apple
Apple is one of the largest publicly traded companies, with a market cap of $938 billion and net income of almost $60 billion in 2018. However, this gigantic tech company has been beaten down recently by sluggish iPhone sales and trouble in China and is now trading down almost 16% from it's 52-week high of $233.47. If Apple's problems can be tackled, then we might have a winner on our hands.
So what's going on in China? Since the U.S. slapped tariffs on their goods the country is going through an "economic deceleration." Last year, China's economy grew 6.6%, it's worst rate in 28 years and this year it is projected to grow even slower. As a result, Apple's first quarter sales were down 25% in China.
To make matters worse for Apple, worldwide iPhone sales were down 15% in its first quarter . The reason? Customers are holding onto their iPhones longer. That's right, new features such as the Super Retina display are not stirring up customers enough to fork over nine-hundred bucks for a new model. This is bad news for Apple because iPhone sales create the majority of its revenue.
Source: Apple
Does Apple have a path forward through its problems? Part of the answer to its woes can be found away from the iPhone in Apple's other product lines -- services and wearables, home, and accessories, Mac, and iPad. These product categories had outstanding growth rates in the latest quarter. Services revenue was up 19% to an all-time high of $10.9 billion, and wearables, home and accessories grew 33% to $7.3 billion. Mac and iPad grew by 9% and 17%. These categories grew by a dollar total of just over $5 billion while the iPhone dropped by $9 billion. In other words, a $9 billion revenue shortfall was turned into a $4 billion problem. If these categories can continue to grow and if better cameras and batteries spur iPhone sales, Apple can return to growth.
In kicking the tires of Apple we find that the company had a 10-year median return on equity (ROE) of 37% compared to an S & P average of 14%. Think of return on equity as how well the company is doing with investors' money. If it can put the capital to good use then investors should receive higher returns. In this case, Apple is turning in a score twice that of a benchmark average.
Turning to another key fundamental, earnings, we see that Apple had five-year earnings growth of 16% and year-over-year growth of 29%. Think of earnings as the funds the company can use to invest in new opportunities or to give back to shareholders in the form of dividends. It is the rocket fuel needed to generate higher returns and in this case, the supply is increasing.
Ultimately, Apple may find relief in the form of a U.S. trade deal with China and through growth of its product categories outside of the iPhone. Also, the company has fundamentals that indicate the company can deliver good returns to investors.
Biogen
Biogen is facing troubles of a different sort than Apple: it can't get its products out the door. In March the large drug company with a market cap of nearly $45 billion announced that trials for its key Alzheimer's drug, Aducanumab, would end after a late-stage trial review found that it was not meeting "end-point goals". In other words, it doesn't work. This came as a huge blow to Biogen, as the treatement was viewed as a potential "blockbuster" and Goldman Sachs pegged future revenues at $12 billion. As a result of this news, Biogen's share price is trading down 39% from last year's high of $388.67 despite revenue growth of 10% in 2018. Can the company overcome the gaping hole left by Aducanumab's end and reinflate expectations? Let's take a look.
Although Biogen has a portfolio of multiple sclerosis drugs which represented nearly 80% of the company's 2018 total product revenues, these treatments were down 4% in sales in 2018. Also, since 2015, the m-s market has become saturated and Biogen now faces competition from generics. In other words, no solution here. However, the company has a treatment pipeline of over 20 drugs including treatments for stroke, lupus, and m-s that could prove to be winners if they come to fruition. The problem though is that these pipelines include clinical trials which take years of research and cost millions of dollars -- Aducanumab cost the company $743 million over the course of three years. Finally, a huge positive for Biogen is the $3.5 billion of cash it has on its balance sheet. This dole could be used to make an acquisition that spurs growth in the coming years.
Turning to fundamentals, we see that Biogen had a 10-year median ROE of 22% which outpaced the S&P average of 14%. However, five-year earnings growth for the company clocked in at 14% while year-over-year growth was 10%. This indicates that the company's fuel source to generate great returns for investors is shrinking.
. . .
All-in-all, the path forward for Biogen is murky at best -- its core m-s products face stiff competition, the pipeline payoff is a roll of the dice, and an acquisition is a guess at this point. Also, we see a trend of shrinking earnings which does not lend itself to higher returns.
In the final analysis, both companies face challenges but Apple has the easier hurdle to jump. The company can look forward to a trade deal and growth in its product lines outside of the iPhone to help with its headaches. Biogen, on the other hand, must look to its treatment pipeline and a possible acquisition to reinflate expectations -- murky solutions at this point. Investors seeking to capitalize on opportunity clothed in trouble should take a look at Apple.
